Under Armour (NYSE:UAA) stock is clearly on fire. Shares of the high-growth sports apparel company are up by an impressive 70% over the last year. Over a longer timeframe, performance has been truly mind-blowing: Under Armour's stock has surged over 850% in the last five years and more than 1,400% over a ten year period. Considering this spectacular rise, investors in Under Armour stock may be wondering if now is the right time to take profits.
Under Armour is certainly priced for demanding expectations, and this is a considerable risk to keep in mind when making investment decisions. On the other hand, there are strong reasons to believe the company still offers substantial upside potential over the long term.
Under Armour is playing to win
In the global sports apparel industry, Nike (NYSE:NKE) is the heavyweight champion, as the company generates nearly $30.5 billion in sales across the world. Although Under Armour is running from behind, it's doing so at an impressive speed, fueled by a voracious competitive drive.
Under Armour CEO Kevin Plank started building the company in his mother's basement in 1996, and always wanted to compete head-to-head against industry leader Nike. Back in the early days, he used to send Christmas cards to Nike founder Phil Knight with a simple and powerful message: "You will hear about us one day."
Nike has certainly heard a lot about Under Armour since then. The company has become a corporation with a market value of nearly $84 billion over a relatively short period of time, and it's delivering extraordinary financial performance, as sales have grown at more than 20% year-over-year during the last 20 consecutive quarters.
Based on the latest financial report, the business continues firing on all cylinders. Total revenues grew 25% year-over-year to $805 million in the first quarter of 2015. Furthermore, performance was quite strong across the company's different growth drivers: apparel sales grew 21%, footwear revenues increased 41%, and international revenues jumped 74% versus the same quarter in the prior year.
Under Armour is making big inroads into connected fitness as well, with acquisitions such as Endomondo, MyFitnessPal, and MapMyFitness. The company's Connected Fitness community has now 130 million unique users across its combined platforms, which, according to management, represents the largest digital health and fitness community in the world. The company is also at the forefront of technological innovation when it comes to wearable computing, integrating into its products sensors to measure speed, calories, heart rate, and other statistics to better evaluate an analyze an athlete's performance over time. Once users are uploading their statistics online and comparing them against both their own progress and the performance of other athletes, chances are they will get increasingly involved in Under Armour's ecosystem. Technological innovation is a signature strength of Under Armour and a major source of competitive differentiation.
In spite of its amazing growth rates over the last several years, Under Armour is still about one tenth the size of Nike on a sales basis. International markets brought in only 12% of Under Armour's sales in the last quarter, while rival Nike produces more than half of revenues in global markets. Nevertheless, CEO Kevin Plank believes Under Armour is on its way to making $10 billion in global revenues over time. This is certainly an ambitious target in comparison with $3.1 billion in sales during 2014, however, it would still represent less than one third of Nike's current size. Considering Under Amour's track record and proven ability to deliver, the company seems to be on track to sustained growth over the long term.
The smart way to invest in Under Armour
Under Armour is clearly priced for growth -- the stock carries a forward P/E ratio of more than 55 times earnings forecasts for 2016. This is a big premium versus the average company in the S&P 500 index, which is in the neighborhood of 18.5. By comparison, Nike is also priced at a premium versus the overall market, but is still much cheaper than Under Armour, with a forward P/E ratio of 26 times earnings.
Under Armour clearly merits a premium valuation versus both Nike and the broader stock market because of its extraordinary performance and abundant growth prospects. After all, not many companies in the market can sustain revenue growth above 20% annually for long periods of time. . However, demanding expectations can set the stage for high volatility, and Under Armour stock is quite vulnerable to any disappointment down the road.
This means that Under Armour is not the best choice for investors looking for stable and reliable companies delivering predictable returns. However, for those investors willing to withstand short-term volatility, the long-term upside potential is remarkably exciting.
In cases like this, patience is not only a virtue, but even a necessity. As opposed to buying a full position at current levels, the smart thing to do is buy partial stakes at different times. For example, you could buy one third of your intended position right now, and wait for a better entry price before buying the other two thirds.
Stock prices are practically impossible to predict in the short term, especially when it comes to an aggressively valued growth stock such as Under Armour. One thing looks clear, though: the company is firing on all cylinders, and it offers enormous room for growth in the years ahead. With this in mind, any short-term dips can be considered a long term buying opportunity in Under Armour stock.
Andrés Cardenal owns shares of Apple. The Motley Fool recommends Apple, Nike, and Under Armour. The Motley Fool owns shares of Apple, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.